Company Notes Digest 8.18.17

Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

Earnings season is wrapping up and retailers are the last to report. The environment was described as a “perfect storm” and “hyper-competitive” with no signs of slowing down. Retailers are trying to move into omni-channel and putting on a good face, but “the definition of loyalty in the retail business for the consumer is the absence of the better alternative.” Consumers will shop wherever they can find the lowest prices at the greatest convenience. At the moment Amazon is the elephant in the room.

Next week begins the summer doldrums for earnings, so we’ll likely take the next two weeks off. Be back again in September.

The Macro Outlook:

We are beginning to see some inflation in food

“after several quarters of lower commodity costs, we are beginning to see some inflation. We anticipate this will curtail some of the hypercompetitive discounting we have seen in recent quarters.” —Jack in the Box CEO Lenny Comma (Restaurants)

The transition has been a little more rapid than normal

“the transition from deflation to inflation has been a little more rapid than normal, and there are certainly some categories where we are seeing more than 2% to 3% inflation…I wouldn’t say we are seeing anything out there today that would be overly difficult for our customers to pass along.” —Sysco CEO Bill Delaney (Food Distributor)

“You know we continually look at months of supply, there is 4.3 months of supply in the market of housing availability against a historical norm of six, that clearly is helping to drive improvement in home value appreciation…So, we see this housing favorability continuing as we look forward. And I think the watch out for us is, you wouldn’t want to see affordability become an issue, but that at this point doesn’t seem to be a concern for us at all.” —Home Depot CEO Craig Menear (Home Improvement)

Mall rents are falling

“we think real estate prices a couple years from now are going to be less expensive than they are today. We’re starting to we’re seeing that as we renegotiate leases or relocate stores. The rents are coming down in all but the true A malls. So, if you take a look at the true A malls we actually think rents in those malls might actually go up…because they’re going to be in such high demand” —Dicks CEO Ed Stack (Sporting Goods)

Consumer:

The retail industry is in a perfect storm

“The retail market is currently in flux. The environment is highly competitive and dynamic…It’s a perfect storm right now” —Dicks CEO Ed Stack (Sporting Goods)

CEOs are trying to stay optimistic

“I also know that we operate in an environment of intense and disruptive competition, and that our customer has more shopping options than ever, and we need to provide her with a compelling and a unique proposition. So winning in this environment requires us to act with a great sense of urgency to make changes in how we operate and to move faster. And as we do this, I am confident that Macy’s will win again.” —Macy’s CEO Jeffrey Gennette (Dept Store)

They argue that omni-channel is essential

“The customer is clearly telling us that brick-and-mortar retail continues to be an essential part of the shopping experience and certainly when it is executed right with the right values. All of this gives us confidence in our long-term global store growth potential.” —TJX CEO Ernie Herrman (Off-Price)

Out of sight out of mind

“there is an impact on a market when you have fewer stores in it and share of mind is therefore decreased, and as a result, those areas where we’ve closed stores, the rate of growth in our omnichannel business has been a little less…Everything that we’ve learned from that store closure pilot has been that reinforcing the importance of a great physical footprint. And we’ve said over and over again, and we have seen nothing that doesn’t support this. In fact, I think the thesis is growing stronger.” —Kohls CEO Kevin Mansell (Dept Store)

But everyone is trying to match Amazon

“I think we are in the time of hyper competition. People are out there trying to get market share. They are doing things that one typically wouldn’t do in a business. I guess, the elephant in the room there, you know who it is, is doing an awful lot of things without regards of the bottom line and is getting rewarded for it. And so there are an awful lot of other people trying to do the same thing. So yes, I think there is margin opportunity. I think we could get there, but I also am very, very aware of the hypercompetitive space that we are in.” —Urban Outfitters CEO Richard Hayne (Apparel)

The price competition is impossible to avoid

“We tried to not be promotional. We didn’t want to be the price leaders in the industry. And as things got competitive and somewhat unpredictable, the consumer told us that they felt that we weren’t priced competitively in the marketplace.” —Dicks CEO Ed Stack (Sporting Goods)

Retailers are doubling down on promotions

“when you look at the marketing strategy…number one, we’re going to remain very promotional. And what we’ve spent a lot of time on is reducing the overlap of promotions, reducing the amount of overlap of discounts on top of each other. But we’re doing that all the way through the back half and that really is a big focus of ours.” —Macy’s CEO Jeffrey Gennette (Dept Store)

Consumers are only as loyal as your prices

“We didn’t start the promotion, but we can’t sit around and pretend it doesn’t happen. We need to engage in that. And our customers have told us, you need to engage here in today’s marketplace…I’m a firm believer that the definition of loyalty in the retail business for the consumer is the absence of the better alternative.” —Dicks CEO Ed Stack (Sporting Goods)

“We continue to gain traction in e-commerce with Walmart U.S. GMV up 67%…we continue our transformation to become more of a digital enterprise that moves with speed and agility…We’ve seen strong results from the rollout of online grocery…Marc Lore and the team delivered another quarter of robust topline growth” —Walmart CEO Douglas McMillon (Big Box Retail)

Technology:

Home Depot spends half its advertising budget on digital

“Our overall advertising spend is up, lower single digits, but as we’ve essentially made more significant pivot to digital marketing it’s over half our marketing right now. That’s a medium that you can get good insight on the return on your spend and as Craig said, the team just done a great job continuing to increase the return on that spend, so leveraging that low single digit to a much more productive return on overall ad spend” —Home Depot EVP Ted Decker (Home Improvement)

Apple products sold well at Target

“on the Apple comments, they weren’t just driven by tablet, they are driven across the board in categories. And we had really strong showing in Q2 on the iWatch which we worked with Apple on clearly. And we have a lot in our plans for Q3 and Q4 with potential new launches as I have outlined.” —Target CEO Brian Cornell (Big Box Retail)

Online video has tailwinds to revenue, but headwinds to profitability

“more and more people are watching online video at longer and longer time, on a daily basis…and at the same time, advertising revenue has been increasing, and there is also an increasing willingness from consumers to pay. So, the subscription number as well as revenue has been increasing quite rapidly. On the other hand, the flip side of this is the cost of content has been increasing, even faster. So, what we see is that over time, we believe the content will continue to increase, but the rates would probably be lower. And the subscription, as we continue to increase, would deliver higher revenue per active user. So, we will get closer to a more equilibrium between cost and revenue at some point in time. But I think unfortunately at this point in time, the net loss of the business is still increasing.” —Tencent President Martin Lau (Chinese Internet)

Neural Nets are improving at a double exponential rate

“A neural net in terms of complexity is approximately – not quite, but approximately doubling every year. And this is one of the exciting things about artificial intelligence. In no time in my history of looking at computers in the last 35 years have we ever seen a double exponential where the GPU computing model, our GPUs are essentially increasing in performance by approximately three times each year…And…on top of it, the neural network architecture and the algorithms that are being developed are improving in accuracy by about twice each year…And so you’ve got these two exponentials that are happening, and it’s pretty exciting. That’s one of the reasons why AI is moving so fast.” —Nvidia CEO Jen-Hsun Huang (GPUs)

The next revolution of AI is at the edge

“The next revolution of AI will be at the edge, and the most visible impactful evidence will be the autonomous vehicle. Our strategy is to build a ground-up deep learning platform for self-driving cars, and that has put us in pole position to lead the charge” —Nvidia CEO Jen-Hsun Huang (GPUs)

“We’re generally positive about the market from the second half 2017 onwards and we believe that every subsequent year will fare better than the year before…environmental regulations will thereafter not only contribute to a transition towards a cleaner environment, but it will also assist shipping in reducing vessel supply and will therefore lead us to better markets as of 2020 onwards.” —Star Bulk Carriers CEO Petros Pappas (Dry Bulk)

Miscellaneous Nuggets of Wisdom:

Take care of your customer on their terms

“What we’ve learned is a customer comes with a return, that’s their errand they have to do, and the more efficient, the faster we are in doing that, the more free time we’re giving back to the customer. And oftentimes, they take that free time and start shopping. So we’re really looking to take care of the customer on their terms, and if they have a great experience in our store with a return, we certainly believe that ends up in good news for us.” —Nordstrom President Erik Nordstrom (Dept Store)